CL: calendar spreads more liquid than outrights,why?

I don't have any practical experience in spread trading so please bear with me...

Following the calendar spreads in CL ( CLH1-CLJ1 ) , I noticed that at the best bid/ask there are constantly much more contracts in the order book than in the corresponding outright contracts....why is that so ?

I have also been trading the H/J spread, watching it move past full carry. Re volumes, if I am a commercial intent on moving the spread beyond carry, spread volumes have to be greater than outright volumes otherwise spread will go nowhere. The contract is obviously "broken", has been the case over the past 2 years (I think the H/J went to about $8.50 2 years ago). I suspect that a number of the commodity futures contracts are going to have similiar problems accomodating increased open interests.

Maybe I can save you some time. By "broken" I simply mean that the contract is not functioning properly and to be more specific, there appears to be a problem with delivery/or lack thereof. I say this because the H/J spread has gone well beyond full carry. This is a problem for the long because instead of rolling their positions at something closer to $.50 which would be manageable over the course of a year (12 x $.50), perpetually rolling at 2-3 $ per month (or more) becomes less feasible and for the commercial carrying a long position, an imperfect hedge. Advantage to the short.

Nymex could possibly increase the threat of delivery by increasing the number of delivery points, I have traded contracts where that has happened. Perhaps this analysis is not necessary for your trading strategy, just trying to shed some light. Be careful for the snapper backer, funds get out and/or roll and the complexion of the H changes. Happy trading.

I don't have any practical experience in spread trading so please bear with me...

Following the calendar spreads in CL ( CLH1-CLJ1 ) , I noticed that at the best bid/ask there are constantly much more contracts in the order book than in the corresponding outright contracts....why is that so ?

More...

becasue spreads do not move near as much as the outrights...little movement=tighter spreads...more movement=great possibility for wider spreads...

I suppose I have some 'local' knowledge in this regard - after four years of trading interest rates with a Full Membership on the floor of the CBOT, I traded energy for several years for a large commercial in the 90's, and have traded both OTC and regulated futures contracts in the energy space for a hedge fund and for private equity pools since then.

Having much more size in the spreads is a common occurrence for any number of markets - indeed, most markets. For example, look at the Eurodollar order book right now at this very instant: ( 8:55pm Central). The GE Mar-Jun Spread is 5275 bid x 36 on the best offer and x 4297 on the next. The GE Mar future is 5509 on the bid, and 3452 on the offer. The June future is 1856 on the bid x 704 on the offer.

The Comex Gold contract Feb-Mar Spread is 184 bid x 72 offered, the Feb future is 1x1, and the Mar future is 6x3 but is also 4 tics wide.

The calendar spread is by far and away the most efficient mechanism for any commercial to roll forward their market exposure - for example, many commercials hedge with strips and use the calendar spread to roll it. An ETF uses the calendar spreads to roll forward their exposure (hence, the "Goldman" roll). And of course there are speculators like me who are in just about every spread market electronically available.

There are alot of large spec accounts who roll individual positions forward in order to maintain or adjust their exposure in the marketplace.

There are tons of uses for calendar spreads in the markets. PIMCO, for example, uses STIR futures to synthetically replicate cash position exposure. It is not uncommon for PIMCO to have on well over 100K Eurodollar futures on at any point in time. They very frequently have to adjust forward duration and curve convexity - and for them to do that with the least amount of slippage, they would, for example, sell a Jun11-Dec13 calendar spread to change that forward curve exposure profile.

So, having more size shown in spread markets compared to flat price futures has always been the norm - it was that way in the pits, and it is that way on the screen for most contracts and market sectors.

Spread, Relative Value, and Correlation Trading Instruction from an experienced Commercial, HF, and Independent Trader and Private Trading Consultant. The only thing that matters are Clients making money IN LIVE MARKETS. Why not interview my clients for yourself on an independent basis. My typical client is an outright directional trader looking to pick up an industry-recognized specialty technique. http://www.spreadprofessor.com SPREADPROFESSOR - TM

"Not only are we seeing high levels of imports, current
inventories at PADD 5 are holding steady relative to last
year: crude oil storage stands 1.82% above last year;
RBOB inventories are 4.73% higher YoY; distillate
inventories are 13.11% higher; heating oil inventories are
22.26% higher; and jet fuel stocks are 11.29% higher
than last year.
Given how high supplies and imports are, it should not
come as a surprise that refiner demand is muted: refiner
net input of crude oil in PADD 5 stands just 0.08% above
last year and 9.88% below the 2004-08 average."

The calendar spread forward curve reflects supply and demand fundamentals, the contract is not broken. The market is what the market is.

Spread, Relative Value, and Correlation Trading Instruction from an experienced Commercial, HF, and Independent Trader and Private Trading Consultant. The only thing that matters are Clients making money IN LIVE MARKETS. Why not interview my clients for yourself on an independent basis. My typical client is an outright directional trader looking to pick up an industry-recognized specialty technique. http://www.spreadprofessor.com SPREADPROFESSOR - TM

Re crude contract, if it isn't broken, can you please cite an example of a commodity spread moving beyond full carry, say going back 20 years ? I do not recall a spread other than the crude spreads over the past 2 years moving past carry. If it isn't broken why are the funds liquidating their longs in favour of Brent ?

"For the last two years, the contango structure embedded in futures prices has far exceeded the actual cost of owning physical raw materials such as crude oil, aluminium and copper, explaining the strong interest from traders and hedge funds in owning inventories or the warehouses, elevators and tank farms that store them. Well-connected banks and physical traders have exploited the difference between the actual cost of financing, storing and insuring raw materials and the implied cost in upward sloping futures prices, as a source of comparatively low risk profits.
It has helped commodity markets carry record stocks and supported overproduction of many raw materials through the recession and the early stages of the recovery with only minimal downward pressure on prices.But the days of physical commodity storage as a licence to print money are ending. An increasing number of other institutions and hedge funds have created their own âvirtual storageâ plays, with negative positions in the spreads, or a short position against commodity indices or customised swaps. As storage plays become more crowded, the contango will continue to erode gradually until it resembles the actual costs of finance, storage and insurance, and this source of relatively risk-free profit is removed. "

Contango aside, the OP's thread was regarding spread liquidity, not sure how your premise about the spread being somehow 'broken' answers his question - there are many examples for spread liquidity exceeding flat price liquidity at the best bid and offer regardless of forward curve shape.

Spread, Relative Value, and Correlation Trading Instruction from an experienced Commercial, HF, and Independent Trader and Private Trading Consultant. The only thing that matters are Clients making money IN LIVE MARKETS. Why not interview my clients for yourself on an independent basis. My typical client is an outright directional trader looking to pick up an industry-recognized specialty technique. http://www.spreadprofessor.com SPREADPROFESSOR - TM